Merck Doubles Down on Debt Reduction

The logo of German pharmaceuticals company Merck is seen in Darmstadt, Germany, March 7, 2018.
Photo:
Merck

Merck KGaA could forego mergers and acquisitions in 2018 and 2019 in a bid to reduce debt, the finance chief of the German drug maker said.

“We will show restraint,” said Chief Financial Officer Marcus Kuhnert in an interview with CFO Journal on Thursday. The company budgeted a maximum of €500 million ($615.7 million) on deals this year, Mr. Kuhnert said.

Merck spent $17 billion to buy laboratory equipment maker Sigma-Aldrich Corp. in 2015, completing the largest deal in its history. The company used cash on hand, sold €7 billion in bonds and took on €4 billion in bank loans to fund the transaction. The deal added €11 billion to Merck’s debt load.

Mergers and acquisitions are crucial to driving growth in the pharmaceuticals sector. Long development phases and trials periods mean companies generally cannot rely solely on organic growth. Sanofi SA, a French pharmaceutical firm, for example agreed to spend more than $15 billion on two companies -- Bioverativ Inc. and Ablynx NV -- since the beginning of the year.

Merck, however, has pursued only small acquisitions since the Sigma-Aldrich transaction, a spokesman said. The size of these deals was less than €500 million, and included partnerships and licensing agreements.

The pharmaceutical company has instead focused on paying down its debts. Net debt totaled €10.1 billion at the end of 2017, compared to €11.5 billion at the prior year end.

Merck will not alter its debt-reduction plan, despite favorable changes in the U.S. corporate tax code, Mr. Kuhnert said.

“We wouldn’t do an acquisition just for tax purposes,” Mr. Kuhnert said. But, over the course of next year, the company could become more acquisitive again, he added. This includes Merck looking at potential targets in the U.S., an “attractive market,” according to the finance chief.

Other European companies said the tax overhaul makes U.S. investments more appealing and are scouting potential acquisition targets. Irish paper packaging company Smurfit Kappa Group PLC, Danish insulin maker Novo Nordisk A/S and Dutch information services and software firm Wolters Kluwer N.V. are all on the hunt for potential deals spurred by the tax law changes.

Merck, however, will only look for new deals once it has divested one or several assets, said Wimal Kapadia, an analyst at Sanford C. Bernstein & Co. “Their [Merck’s] primary goal is to deleverage,” Mr. Kapadia said.

Merck’s ratio of net debt to earnings before interest, tax, depreciation and amortization was 2.3 times at the end of 2017, Mr. Kuhnert said. The company is targeting a ratio of less than 2 times net-debt-to-ebitda, he said.Merck on Thursday reported sales of €15.3 billion for 2017, up from €15.0 billion in 2016. Profit after tax was €2.6 billion in 2017, significantly higher than the €1.6 billion recorded in 2016.